States surge towards a power merge

With growing disparities in region-to-region power prices and state budgets under pressure, governments are increasingly tending towards merging electricity businesses.

The urge to merge electricity businesses is gripping governments in our neck of the woods.

First cab off the rank was Anna Bligh’s government in Queensland. It rejigged the three generation businesses that had been derived from the old State Electricity Commission into two, CS Energy and Stanwell Corporation, last year.

Now West Australian Premier Colin Barnett has said his government, which inherited a can of worms in the electricity sector from the Labor regime of the previous decade, is going to put the state-owned generator, Verve Energy, back with the energy retailer, Synergy, partially undoing the disaggregation of the late 1990s.

Meanwhile, there is growing speculation in Sydney that Barry O’Farrell’s government is going to go further with network mergers than it originally planned, creating one large distribution business out of the three that exist today.

Initially O’Farrell’s government had indicated that it planned to, in effect, pick up the Queensland model for distribution: north of the Tweed there are two utilities, Energex serving the populous south-eastern corner of the state and Ergon Energy delivering power to the other 97 per cent.

This is a reflection of the fact that carrying power to sprawling rural and regional communities is a different ball game to delivering it to large, urban load centres – which is the reason that rural NSW customers pay more in network charges than their city cousins.

The Queensland government gets around this politically irksome disparity by subsidising the regional power bills to the tune of about $400 a year each and smearing the cost across the Brisbane/Gold Coast/Sunshine Coast consumers’ bills.

It won’t be easy for O’Farrell to try that trick in NSW – there is more than enough urban angst about rising power bills already.

There’s also speculation in Sydney that O’Farrell and his treasurer, Mike Baird, are looking at copying the New Zealand privatisation model. Over there, newly re-elected PM John Key is pushing a program to progressively sell 49 per cent of state-owned businesses, starting with the power generation sector.

O’Farrell has already committed to privatisation of the NSW generation businesses – what’s left after the much-criticised Keneally government’s "gen-trader” deals – and pledged not to sell the network businesses during this term of office.

Financially, this should be no great hardship for the NSW government because it could hope to raise about $6 billion from the sale of Macquarie Generation and the remnants of Delta Electricity and Eraring Energy.

If it has the nerve, it can also look to sell its share of the Snowy Hydro business, in which it is the major shareholder with the Victorian and federal governments holding 42 per cent between them. The Snowy is thought to be worth $5 billion to $6 billion.

The three NSW distributors – now called Ausgrid, Endeavour Energy and Essential Energy after Keneally flogged their Energy Australia, Integral Energy and Country Energy names as part of the retailer sales last year – plus the high voltage network business TransGrid are thought to be worth about $26 billion to $29 billion today.

All are engaged in major asset building at present as they struggle to overcome a backlog of infrastructure tasks, having been held back last decade by regulatory decisions to sit on retail power prices. Since 2009 they have been let off the leash and are engaged in a $17 billion, five-year development plan to meet growing demand (especially peak consumption of power) and to replace aged assets, more than a few of them 40 to 50 years old.

By 2015 – the next state election will be held in March that year – these businesses will be refurbished, charging higher delivery fees than today, and monopoly providers in a growing market.

Whatever issues the mooted "three-into-one" merger of the distributors may raise in terms of operational management, it is hard to see how a large single network business plus TransGrid would be any less attractive to investors, not least the Asia-based companies that specialise in utilities, than they are today.

The Energy Supply Association last year forecast that system energy – the amount of power passed through the network calculated before line losses – would rise from 77,720 gigawatt hours in NSW in 2010-11 to almost 91,000 GWh by 2019-20.

Even allowing for the ongoing impact of the global economic shenanigans, the networks’ activities will be bigger and more valuable by mid-decade than they are today.

Barnett, meanwhile, is fed-up with the problems his Labor predecessors created by hiving off energy sales from generation in the west. He claims the situation is adding to end-user costs and pushing up carbon emissions on some occasions.

Sensibly, he feels no urge to meld the networks operation – a joint distribution and transmission business titled Western Power – with Verve Energy and Synergy, but he wants to create one "gen-trader” that, he says, will put an end to the pair competing with each other and damaging each other.

The interesting thought is whether coalition governments in the west (Barnett is due back at the polls in early 2013), in Queensland (where Campbell Newman is favourite to beat Bligh in next month’s poll) and in NSW (where O’Farrell would be runaway favourite to win in 2015, given his huge current majority) might all find themselves in mid-decade wanting to follow John Key’s privatisation model?

We’re talking $50-60 billion worth of Australian assets here – even selling 49 per cent of them would make a more than useful contribution to hard-pressed state budgets.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.

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